At the end of 2011, sovereign-wealth funds’ (SWFs) assets under management amounted to US$3 trillion, following 237 direct investments worth US$81 billion that year. Some experts even estimate SWFs’ assets to be worth US$6 trillion. This means that SWFs, the avatars of state capitalism, are now twice as rich as the world’s hedge funds, the totems of liberal capitalism’s excesses.
The growing might of SWFs is causing concern — and, in some cases, inciting virulent criticism — particularly in host Organisation for Economic Co-operation and Development countries, where many fear the redistribution of financial, economic, and political power to emerging countries that have very different political regimes from their own. In fact, of the seven SWFs that control more than two-thirds of all these funds’ assets, three are from Asia (one from China and two from Singapore) and three are from the Middle East (Abu Dhabi, Kuwait and Qatar).
European countries rank first among hosts for SWF investments, accounting for more than 40 percent of the total value of deals in 2011. The US, where opposition to such investments has been stronger, accounts for less than 10 percent.
These countries’ concerns are not entirely unfounded. SWFs pose concrete risks, some of which have already materialized, to the global economy and to financial markets both at home and in host countries.
For example, some SWFs faced temporary, but significant, losses after the US subprime mortgage bubble burst in 2008 and after the EU’s sovereign-debt crisis erupted a year later, owing to a high level of exposure to these economies’ property, financial and sovereign-debt markets. Those that have not been hit have been protected by host-country opposition to projects in strategic sectors and by the fact that SWFs, aware of the sensitivity of their investments and afraid of potential retaliation, have mostly taken small stakes — 1 to 2 percent — in their targets.
There are some exceptions to this pattern. The Chinese Investment Corp’s (CIC) biggest investment last year was a 30 percent (US$3.2 billion) stake in the gas and oil exploration and production sector of the French energy giant GDF Suez. CIC chose to take a significant share in one branch, rather than a small share in the whole group, because doing so offered both a strategic advantage (access to energy resources) and a monetary benefit (investment in US dollar-denominated assets).
In general, however, opacity is a defining feature of most SWFs, exacerbating the risks that they pose. While some SWFs, like Norway’s Government Pension Fund Global, are transparent, little information is available on most SWF’s size, portfolio holdings, investment strategy, performance, or mode of governance.
Enhancing transparency is one of the main aims of the Santiago Principles — a set of 24 voluntary guidelines that stipulate best practices for SWFs. Twenty-five countries have signed on to the principles since 2008, but while they are an important first step toward managing SWF’s legal framework, institutional and governance structure, and investment and risk-management policies, they are unevenly applied and are widely considered inadequate.
Given the geographical distribution of SWFs and their investments, truly global regulation is highly unlikely. However, without closer monitoring, SWFs will inevitably face politically motivated restrictions by some host countries, so it is in their interest to intensify their efforts at self-regulation.